As Halloween approaches, our minds wander to scary stories involving ghosts and goblins. Just as scary—and all too real—are the stories about what can go wrong with our credit, as well as how those mistakes and mishaps can haunt us later.
Here’s a look at five credit horrors, along with tips from personal finance expert Liz Weston on avoiding them—or at the very least, getting your finances back on track.
Carrying a high balance. In addition to costing you money in interest, credit card balances raise your debt utilization ratio (the amount of money you owe compared to your available balance), which can lower your credit score and increase your risk of bankruptcy.
“People think erroneously that that credit card debt is somehow normal,” says Weston, author of There Are No Dumb Questions About Money. “I encourage people to make sure you don’t charge more than you can pay off each month even if it means bating beans and rice for the rest of the month.” If you’re already in debt, she suggests cutting back on spending and bringing in extra money so you can pay it off.
Cosigning on a loan. Say you have a friend or relative with credit issues who’s having trouble getting approved for a lease on apartment or a loan on a car. If you cosign for that person and he or she defaults, then your credit could suffer, too. “You’re essentially handing your credit history and your credit future over to someone who is not creditworthy,” says Weston. “If they were creditworthy they could get credit on their own.”
Her advice? Don’t get “tricked” into cosigning for anybody. And if you’re already in that position? According to Weston, “if the person is making payments on time and they have built up a little credit history, you can ask if they can find a way to refinance the loan in their own name. That’s the best-case scenario. The alternative is to say ‘I’m taking over the payments, you’ll pay me from now on.’” You’ll have to absorb that cost if they pay you late (or not at all), but at least it won’t trash your credit.
Missing a payment. If you have a good credit score, then one or two missed payments may not seem like a big deal. But making a payment 30 or more days late can reduce your score by up to 110 points, according to Weston.
“Something you’ve taken years to build up can be really hurt overnight,” she adds. Instead of waiting for a paper bill to arrive and prompt you to make a payment, she suggests automating payments online. That way, if you’re traveling or a bill gets lost in the mail, your credit won’t suffer.
Having your identity stolen. It’s no treat when someone else applies for credit cards or loans in your name, because those accounts can show up on your credit report and lower your score. Unfortunately, Weston says it’s impossible to completely eliminate the risk, but checking your credit report annually can alert you to a problem. If you do notice an issue, then consider putting a fraud alert on your credit file or getting a credit freeze. A fraud alert is a free, short-term option that “signals to lenders that they should take extra steps to make sure that whoever’s applying for credit is who they say they are,” explains Weston. A credit freeze may cost you money, but it ensures that only your current lenders have access to your credit file so no one can open new accounts in your name while your credit is frozen.
Getting fraudulent charges. Even if your identity isn’t outright stolen, you could fall victim to small, unauthorized charges like extra ringtones or horoscopes on your phone that you didn’t even know about. That’s why Weston recommends reviewing each credit card statement carefully and disputing suspicious charges.
“Don’t let even small charges go under the radar,” she says. “A lot of businesses out there make a lot of money charging small amounts for things you didn’t order. The nice thing about a credit card is you’ve got a middleman to help you with these disputes.”